EBF RESPONSE TO THE ECON QUESTIONNAIRE ON ENHANCING THE COHERENCE OF THE EU FINANCIAL SERVICES LEGISLATION

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1 EBF ref EBF RESPONSE TO THE ECON QUESTIONNAIRE ON ENHANCING THE COHERENCE OF THE EU FINANCIAL SERVICES LEGISLATION IDENTITY OF THE CONTRIBUTOR Name of organisation: European Banking Federation Name of contact point for response: Wilfried WILMS Contact details: Main activity of organisation: Industry Trade Body Registration ID in the Transparency register (where applicable): Preliminary Observations In preparing our input to Questions 1 to 3, we have preferred adopting a rather restricted view of what is meant by (in)coherence. - Coherence is a relative concept: what may be perfectly coherent adopting a given overall strategic perspective, may no longer be consistent once the main building blocks underlying that strategic vision are put into question. As our contribution is not intended to bring into the discussion issues which may be considered controversial, we have made an attempt to avoid bringing up issues which would imply challenging basic strategic orientations which EU authorities have opted for in the past. - We have, in particular, restrained from highlighting inconsistencies which have knowingly been introduced by the European legislator and have opted instead for focusing on inconsistencies and overlaps that may be qualified as unintended. 1. Are there specific areas of EU financial services legislation which contain overlapping requirements? If so, please provide references to the relevant legislation and explain the nature of the overlap, who is affected and the impact. We have spotted the following overlaps: 1.1. Banking Supervision - Administrative Sanctions and Measures 1

2 - Proposal for a Directive on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and amending Directive 2002/87/EC (CRD IV) - Proposals for a Single Supervisory Mechanism (SSM Proposals) The SSM Proposals authorise the ECB to take sanctions (Article 15 of the Proposal for a Council Regulation). It would, more particularly, become possible for the ECB to impose sanctions up to twice the amount of the profits gained or losses avoided or up to 10% of the total annual turnover in the preceding business year. However, CRD IV already introduced a wide range of administrative sanctions and measures that competent authorities may take, of which the level differs [see in particular Articles 66, Paragraph 2, (c) and (d) as well as Art 67 (2) (e) and (f).] 1.2. MiFID: COMPLIANCE FUNCTION - ESMA Guidelines 2012/388 on certain aspects of the MiFID compliance function requirements - ESMA Consultation Paper on Guidelines on remuneration policies and practices The fist document the compliance guidelines deals extensively with the responsibilities of the compliance function whilst the subsequently issued remuneration guidelines also address the compliance function s responsibilities. However, the relationship between both sets of guidelines has never been clarified. It is therefore unclear whether the remuneration guidelines are intended to confirm, flesh out or extend the compliance guidelines. It would be desirable to have all the requirements governing the compliance function in a single document Reporting of Derivatives Transactions - Proposal [COM(2011) 656 final] for a Directive on markets in financial instruments repealing Directive 2004/39/EC (MiFID) - Regulation No 648/2012 of 4 July 2012 on OTC derivatives, central counterparties (CCPs) and trade repositories (TRs) (EMIR) Under MiFID financial intermediaries have to report transactions on derivatives admitted to trading in Europe. 2

3 However, under EMIR all counterparties to any derivative trade (including over-the-counter derivatives) must report the transactions to an approved trade repository. Therefore, presently firms have to comply with both the transaction reporting and trade reporting obligations. For listed derivatives this involves duplicating the reporting to national regulators and trade repositories. It needs to be added that this cumulative EMIR trade reporting obligation and MiFID transaction reporting requirements will be applicable until MiFID2 is implemented Wholesale Energy Markets Reporting Obligations - Directive 2003/6/EC of 28 January 2003 on insider dealing and market manipulation (market abuse) - Proposal [COM(2011) 656 final] for a Directive on markets in financial instruments repealing Directive 2004/39/EC - Regulation n 1227/2011 on wholesale energy market integrity and transparency (REMIT) As MiFID and the Market Abuse Directive were designed for financial markets, they touch upon the energy market only to a limited extent: they did not cover wholesale energy markets but only energy derivatives traded at energy exchanges. REMIT is intended to fill the gap. To avoid possible overlaps in the area of reporting and market monitoring in respect of wholesale energy products that are financial instruments for the purposes of MiFID, the REMIT Regulation considers the reporting obligations that it imposes to have been fulfilled whenever a market participant or a third party acting on its behalf, a trade reporting system, an organized market, a trade-matching system, or other person professionally arranging transactions has fulfilled its reporting obligations to a competent authority in accordance with MiFID or applicable Union legislation on derivative transactions, central counterparties and trade repositories. However, the exemption applies only to the extent that all the information required under the REMIT Regulation has been reported. For the case that the collected data falls both under REMIT as well as MiFID reporting obligations the receiving authority be it the Agency for the Cooperation of Energy Regulators (ACER) or ESMA - should formally acknowledge upon the market participant that the reported data fulfils the obligation both under MiFID and REMIT. This is necessary to provide legal certainty for the involved parties and to avoid any ambiguity 2. Are there specific areas of EU financial services legislation in which activities/products/services which have an equivalent use or effect but a different form are regulated differently or not regulated at all? If so, please provide references to the relevant legislation and explain the nature of the difference, who is affected and the impact. 3

4 We have spotted the following inconsistencies: 2.1. Definition of Capital Software - Regulation on prudential requirements for credit institutions and investment firms (CRR) - Solvency II In general, a primary focus of attention is and remains the competition which exists between banks and insurance companies. EU legislation covering each of both sectors have generated sets of rules which define the same concepts in different ways and often deal differently with the same or similar issues. One typical example which is worthwhile highlighting in particular is the treatment of software for capital definition purposes. In conformity with a decision taken at the level of the Basel Committee, the CRR requires banks to deduct intangible assets from Common Equity Tier 1. The rationale underlying this decision is that intangible assets (notably goodwill, i.e. the price supplement paid when acquiring another company) cannot be used to indemnify creditors in a stress situation and hence cannot be considered as absorbing losses. However, - under Solvency II, intangible assets, other than goodwill, are recognised in the balance sheet if they can be sold separately and the insurance and reinsurance undertaking can demonstrate that there is a value for the same or similar assets that has been derived from quoted market prices in active markets. As a result, the value of software is recognized. - US banks do not need to deduct software from their Own Funds on the ground that under US GAAP software is not classified as an intangible asset but as a tangible asset Banking supervision Liquidity - Regulation on prudential requirements for credit institutions and investment firms (CRR) - Proposal for a Directive establishing a framework for recovery and resolution for credit institutions and investment firms The CRR introduces two ratios on liquidity, and notably a short term ratio (LCR). However, the proposal for a Directive suggests excluding short-term liabilities from the scope of bail-in (the European Parliament voted this position also the 21 st of May), which will encourage market participants to reduce the maturity of their loans to banks and, therefore, weaken their liquidity profile which is not the goal which the LCR pursues. Both proposals are contradictory. 4

5 2.3. Treatment of Alternative Investment Fund Management - Proposal [COM(2011) 656 final] for a Directive on markets in financial instruments repealing Directive 2004/39/EC - Directive 2011/61/EU of 8 June 2011 on alternative investment fund managers (AIFMD) Although both legal instruments touch upon the provision of investment services, Alternative Investment Fund Managers are outside the scope of MiFID. However, the AIFMD gives EU Member States the option to permit external AIFMs authorised by them to provide the following MiFID services in addition to the management of AIFs: - discretionary portfolio management, - investment advice, - safe-keeping and administration of certain assets; and - reception and transmission of orders. In providing those additional services the AIFM will in fact be subject to certain MiFID provisions, though it will not be authorised under MiFID. As a result there are some areas of uncertainty as to the interaction between the AIFMD and MiFID. For example it is not clear whether an AIFM that is authorised to provide the above MiFID services has the right under the AIFMD to passport those services to other Member States or whether the regulatory capital requirement for an AIFM which provides MiFID services would be that of the AIFMD or rather the EU Capital Adequacy Directive, which applies to MiFID firms Accounting Directives - Country-by-Country Reporting - Regulation on prudential requirements for credit institutions and investment firms (CRR) - Directive 86/635/EEC (Bank Accounts Directive) Article 86 (a) CRR requires banks to disclose annually, on a consolidated basis, specifying by Member State and by third country in which it has an establishment, amongst others, its name(s), nature of activities and geographical location and turnover. However, by virtue of the Bank Accounts Directive, the balance sheet of a bank does not include a line disclosing their "turnover". It is, therefore, impossible for banks to comply with the proposed requirement Consumer Protection - Treatment of Bundling Practices 5

6 - Directive 2008/48/EC on credit agreements for consumers - Proposal [COM(2011) 656 final] for a Directive (recast) on markets in financial instruments MiFid2) - Proposal [COM(2012) 360/2] for a Directive (recast) on Insurance mediation Bundling is the sale of two or more products or services as one package. However, on the basis of the EU Consumer Protection Directives (or proposals for a Directive) referred to above, such practice is not dealt with in a homogeneous way, without due justification. - Directive 2008/48/EC: requirement to inform the customer of any obligation to enter into an ancillary service contract relating to the credit agreement, in particular an insurance policy, where the conclusion of such a contract is compulsory in order to obtain the credit or to obtain it on the terms and conditions marketed (Article 5, under k). - MiFID 2 Proposal: requirement to inform the customer on whether it is possible to buy separately the different components of the investment service which are offered as a package or as a condition for the same agreement or package (Article 24, Paragraph 7). - Insurance Mediation Proposal: an insurance company/intermediary offering a service or product together with another service or product as a package is required to offer and inform the customer that it is possible to buy the components of the package separately and shall provide information of the costs and charges of each component of the package that may be bought through or from it separately (Article 21 paragraph 2) European Standardised Information Sheet (ESIS) - Proposal for a Directive [COM(2011) 142] on credit agreements relating to residential property - Consumer Credit Directive 2008/48/EC The ESIS concept was introduced in the European Code on Home Loans as a tool to standardise credit information at a pre-contractual stage. Within the framework of the Consumer Credit Directive, it is being referred to as the Standard European Consumer Credit Information (SECCI). However, - Proposal [COM(2011) 142] requires ESIS to be provided without undue delay after the consumer was given the necessary information (Article 9, Paragraph 2); - Directive 2008/48/EC requires SECCI to be provided in good time before the consumer is bound by any credit agreement or offer so that the consumer can compare different offers and make an informed decision (Article 5(1). It would be appropriate for both legal instruments to make use of identical wording. 6

7 2.5. Definition of Payment Transaction - Directive 2007/64/EC on payment services in the internal market (2007/64/EC) - Regulation 924/2009 on cross-border payments in the Community Each of both legal instruments contains a definition of the concept of payment transaction which is largely similar: - Directive 2007/64/EC: an act, initiated by the payer or by the payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee" (Article 4, Paragraph 5); - Regulation 924/2009: an act, initiated by a payer or by or through a payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee (Article 2, Paragraph 7). However, both definitions are not identical. Although it needs to be recognised that the differing definitions do not appear to crate implementation or operational difficulties, it is nevertheless odd to note that the definition contained in the two legal instruments are not the same. The second definition should be used when revising Directive 2007/64/EC. 3. Do you consider that the way EU financial services legislation has been transposed or implemented has given rise to overlaps or incoherence? If so, please explain the issue and where it has arisen, giving specific examples of EU financial services legislation where applicable. We believe the following example to be worthwhile highlighting Supervisory Reporting Uniform IT-Solutions - Regulation on prudential requirements for credit institutions and investment firms (CRR) - EBA Consultation on draft ITS on supervisory reporting requirements for institutions (CP50) The CRR requires the European Banking Authority to develop implementing technical standards to specify uniform IT solutions to be applied in the EU for supervisory reporting. However, 1) the IT solutions which CP50 proposes are not uniform as it takes the view that it should be up to each individual EU supervisory authority to decide if it will accept the XBRL format (instead of leaving the choice up to firms). The solution which the Consultation Paper proposes creates an unnecessary additional burden for groups which have 7

8 subsidiaries in several Member States and would, therefore, create an obstacle to a proper functioning of the Internal Market. 2) CP50 does not come up with a uniform IT solution concerning electronic signatures. Today, each supervisor imposes its own type of electronic signature to the banks which it supervises. As a result, institutions which are active in more than one Member State are obliged to use a different type of electronic signature depending on the supervisor to whom it needs to report. This is not in accordance with the Single Rulebook which the CRR aims to achieve. By failing to address this issue, the Consultation Paper has not satisfied the requirement which Article 95 imposes on the EBA. If the final version of the Consultation Paper would not deliver a uniform electronic signature, as required, it should at the very least accept that the type of electronic signature which the home country supervisor imposes needs to be accepted by every host supervisor. 4. How has the sequence in which EU financial services legislation has been developed impacted your organisation? Please identify the relevant legislation and, where applicable, specific provisions and explain the nature of the impact. There are many instances in which EU financial services legislation (including secondary legislation) merely aims at implementing decisions which have been taken at a global level by international organisations (such as the Basel Committee on Banking Supervision), without providing much leeway in this regard to their membership. As a result, consultations which are being held by EU authorities at an EU level once the decision-making process on a global level has more or less been finalised, do no longer make sense. The EBA Consultation paper on draft implementing technical standards on Disclosure for Own Funds illustrates this perfectly. It is essential, therefore, that a requirement be introduced for EU authorities and/or supervisory agencies to consult European stakeholders in a formal way before any decision has been reached at a global level. Introducing such a process might increase the influence of the EU which often fails to speak with one voice at international fora. 5. Are there areas of EU financial services where the difference between forms of regulation (non-binding Code of Conduct or Recommendation to Member States vs legislative proposals) has affected your activities? Codes of Conduct prepared by the industry itself remain useful. The banking industry has been particularly active during recent years to improve banks risk disclosures by adopting voluntary initiatives which have been successful, i.e: - The EU industry has adopted Industry Good Practice Guidelines on Pillar 3 Disclosure Requirements for Securitisation in January These guidelines have been particularly helpful to the EU supervisory community to make them understand the many difficulties 8

9 with which banks were confronted when implementing the Pillar 3 framework due to the lack of sufficient guidance provided by the Basel Committee. - An Enhanced Disclosure Task Force consisting of representatives from the industry, the investor community and the audit profession prepared a set of recommendations in October 2012 developing principles for enhanced disclosures by financial institutions, including ways to enhance the comparability of disclosures. 6. How do you think the coherence of EU financial services legislation could be further improved? Please comment in particular on the extent to which the following would help to improve the coherence of future EU financial services legislation (please give examples to support your answer where possible): a) a framework for legislative reviews or review clauses included in initial pieces of legislation which link to the reviews of other related legislation? It may be worthwhile examining this suggestion. b) a unified, legally binding code of financial services law? The main difficulty explaining why it would probably be too premature envisaging a unified Financial Services Code is the current co-existence of Directives and Regulations. c) different arrangements within the EU institutions for the handling of legislative proposals (please specify)? - Timing of the Implementation of EU Legislation The implementation of EU legislation concerning financial sector services requires EU supervisory agencies to draft detailed technical rules. It is essential for the quality of regulation and for the international credibility of the ESAs themselves that the ESAs are provided with the time and opportunity to succeed. Level 1 Legislation should, therefore, restrain from imposing very short timeframes on the EU supervisory agencies. More particularly, timelines for level 2 implementation, as set out in level 1, should not be defined in absolute date-specific terms, but by specifying a period for ESA drafting, starting from the date when the level 1 measure is adopted (or enters into force). It is critical that the ESAs be given a period of no less than 12 months post-adoption (or entry into force) to draft standards. Furthermore, to the extent that it may be considered impracticable for the ESAs to complete all of the envisaged mandates to a high quality within a particular timeframe (given available resources) we would suggest that a principle of prioritisation be incorporated in the level 1 mandates. If all tasks cannot be achieved over a specific period, a phased approach should be taken. Ideally, the 9

10 legislators should consider conferring powers on the European Commission to extend the implementation deadlines in justified instances. - Enforcement of ESMA Guidelines The competent authorities within Member States are required to implement ESMA guidelines on a comply-or-explain basis. It would seem, however, that national competent authorities have confirmed that they subscribe to the ESMA guidelines notwithstanding that they have failed to integrate the guidelines into their supervisory practices in full. Such practices create an unlevel playing field. Moreover, and more importantly, they clash with the very objective of the existence of ESMA guidelines, which is ensure the coherence, efficiency and effectiveness of supervisory practices and the common, uniform and consistent application of EU law (cf. Article 16 of Regulation (EU) No 1095/2010). - Need to consider the outcome of relevant research when preparing legislation There have been several instances in which the European Commission has taken the initiative to launch legislative proposals without awaiting the outcome of relevant research that EU official bodies were still in the process of undertaking. Clearly, legislative initiatives need to be taken only once the facts are evident and not before. Illustration # 1: Payments Account Access Services (PAAS) & Payment Initiation Services (PIS) The European Commission is expected to publish a proposal for a revised Payment Services Directive (PSD) on 17 July An issue that the forthcoming proposal will need to address is the establishment of a harmonised European framework for the security of payment account access services, i.e. Payments Account Access Services (PAAS) which are rapidly gaining importance and Payment Initiation Services (PIS) which are already among the most important payment methods for e-commerce in some Member States. The timing of the forthcoming proposal is unfortunate as it will not allow taking into account two workstreams which may have a bearing on the debate: (i) The European Network and Information Security Agency (ENISA) is currently collecting information about the security of authentication methods used for e- payment. The outcome of the survey of ENISA is expected for November 2013, i.e. 4 months after the publication of the proposal. (ii) The ECB has launched a consultation on the issue of access to bank account by third party providers of which the deadline for response was set on 12 April The European Commission proposal is, therefore, not likely to take its outcome into account. 10

11 Illustration # 2: Multilateral Interchange Fees The European Commission is expected to issue a proposal for a Regulation on multilateral Interchange Fees on 1 July However, a study on the cost of payments for merchants (merchants payments acceptance survey) which is currently being carried out by a consultancy on behalf of the European Commission, will be finalised after the summer only, i.e. after the publication of the Commission s proposal. d) other suggestions? - Impact Assessments It would be valuable if the European Parliament would more closely scrutinise impact assessments conducted by the European Commission or supervisory agencies considering that such assessments are often far too general and, moreover, partial as they often merely tend to demonstrate that regulation is necessary whilst failing to give sufficient weight to possible negative consequences and, moreover, to identify those who may particularly suffer. They are, therefore, not always very convincing. - Towards an EU Forum to schedule the introduction of Reporting Requirements? One of the main benefits of the introduction of a Single Rulebook is that the new supervisory reporting requirement framework will deliver requirements that are harmonised across the European Union. However, now that this issue is no longer dealt with by domestic authorities, it appears to have become more difficult for banks to gain timely insight into what the future will bring as long as no final decision has been taken by the competent EU authority. As a result, the industry is seldom provided with an opportunity to be informed of new, forthcoming reporting requirements at an early stage of the process, which makes it difficult for banks to prepare their IT-systems in a timely way. This calls for setting up an official forum at EU level mirroring what existed at a Member State level when national authorities were still in charge of reporting. Such a forum would provide the industry with an opportunity to exchange of views with EU authorities on the timing of forthcoming changes and possibly to agree on detailed planning which include key intermediate milestones (CP, final requirements, test-phase, parallel-reporting) as well possible ways of integrating those new workstreams into ongoing projects and initiatives. 7. What practical steps could be taken to better ensure coherence between delegated acts and technical standards and the underlying "Level 1" text? - Level 1 legislation should be elaborated with closer involvement from the ESAs to ensure a clearer distinction between political and technical processes and issues and introduce a dose of realism as to the preparation of L2 texts. 11

12 - ESAs recommendations and guidelines that are to be implemented on a comply or explain basis - should not be used to clarify Level 1 texts that are formally under review or will be under review according to the Commission s published Work Programme. Using such tools at that stage in time creates unnecessary uncertainty and puts pressure on market participants to adapt to texts that are undergoing change, hence unnecessarily straining compliance and raising costs. In fact, if guidelines and recommendations can be used to pre-empt Level 1 changes, why should the EC propose those changes in the first place? 8. (a) Which area or specific change would you identify as the highest priority for the mandate in terms of improving the coherence of EU legislation? We have no outspoken views on this for the time being. (b) Do you consider that the EU legislative process allows the active participation of all stakeholders in relation to financial services legislation? The EU supervisory agencies should observe a 3-month consultation period as a general rule. If there would be specific reasons justifying the consultation period to be reduced, the consultation should be required to mention them explicitly. It is in any event not acceptable that, whenever delays in the process are being created by internal disagreements within the ESAs themselves, stakeholders would be penalised for this by means of a reduced consultation period. (c) What, if any, suggestions do you have for how stakeholder participation could be enhanced? The Legislative Observatory which the European Parliament has set up is an excellent tool to provide insight into the state of play of the EU decision-making process. It would be valuable if the European Parliament could examine ways to inform European citizens and other stakeholders about its existence. 10. Do you consider that EU legislators give the same degree of consideration to all business models in the EU financial sector? Please explain your answer and state any suggestions you have for ensuring appropriate consideration of different business models in the development of EU financial services legislation. The legislative frameworks that apply to financial services (CRD, Solvency II and MiFID) include several explicit references to the Principle of Proportionality (PoP) in that the measures which they impose must be proportionate to the nature, scale and complexity of the credit institution's activities, their internal organisation or risk profile. It is possible, as a consequence, to give consideration to specific models in the EU financial sector. 12

13 Considering that the implementation of the new financial regulatory framework creates a tremendous administrative burden which is particularly challenging to smaller banks, the PoP can be put at use to bring those banks some relief. However, there are limits to what the PoP is able to achieve - Some have suggested applying the PoP by distinguishing between cross-border institutions and those which are merely active in one single Member State, the idea being that the latter should be able to benefit from a lighter touch regulation. However, such a proposal clashes upfront with what the Single Market concept aims to achieve. - Another remedy that is often being advocated consists in introducing exemption thresholds which would exempt smaller institutions from some requirements. However, the PoP was never meant to allow any entity to be exempted from its legal obligations but only to allow for their proportionate application. As the PoP is all about achieving a right balance between objectives pursued by legislation and the means which are being used to achieve those, one cannot possibly expect it to provide easy solutions. There is no other way, therefore, than to examine on a case-by-case basis how it can be put at use to adapt requirement to the nature, size, scale, and complexity of the institution on a case-by-case basis. The EBF has, therefore, encouraged the EBA to explore if there other, innovative and more straightforward ways would be available to alleviate the administrative burden of smaller institutions. It has proposed in particular that the EBA would prepare a specific, limited COREP package for institutions which only develop a limited range of activities. Such an initiative would avoid that banks with a limited number of staff would be obliged to analyse pages and pages of templates to find out precisely which ones are relevant to them. 13